Income from Sale of ADR Stock Rights? - Form 1099-B

My 2010 Form 1099-B shows Gross Proceeds from the sale of rights for ADR shares. I received these proceeds, as I had not exercised the right to buy more ADRs of the company issuing the extra shares. I opted out of the new purchase of shares, so the company issuing the shares sold my rights at fair marlket value and sent me the proceeds, which were included in F1099-B. When I prepared my 1020 Tax Return, I omitted to include this in my Capital Gains & Losses, as I had not actually sold shares. When I had downloaded (from my bank's website) my "Gains & Proceeds", it did not show.

Yesterday, I received a notice from the IRS believing that this is a non-reported sale of stock and, as they have no cost of basis, they send the whole amount to Income.

Questions: 1) I never received any information on how this amount was determined, but I believe I should first determine the cost of basis. I have read in Publ 550 that the cost basis of Sales of Rights is the Fair Market Malue at the time of receiving them. As the bank directly sold them, I assume that they were sold at cost, so my "profit" would be zero. Is this correct?
2) These are IRE (Bank of Ireland) ADRs. Therefore, if my assumption in "1)" that the profit is zero is NOT correct, wouldn't this at least qualify as foreign income for the foreign tax income creidt?

Thank you!

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Originally Posted by guscusi

Questions: 1) I never received any information on how this amount was determined, but I believe I should first determine the cost of basis. I have read in Publ 550 that the cost basis of Sales of Rights is the Fair Market Malue at the time of receiving them. As the bank directly sold them, I assume that they were sold at cost, so my "profit" would be zero. Is this correct?

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Could you please provide the section in Pub 550 that you are referring to? On page 23 of Pub 550 in the section regarding stock rights there's a section titled "Basis" which says in part: "Your basis in stock or stock rights received in a taxable distribution is their fair market value when distributed." So I don't see where you're reading that basis is the FMV when sold?

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Originally Posted by guscusi

2) These are IRE (Bank of Ireland) ADRs. Therefore, if my assumption in "1)" that the profit is zero is NOT correct, wouldn't this at least qualify as foreign income for the foriegn tax income creidt?

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Yes, if you can document that you actually paid foreign income tax on the sale of these shares. The year-end statement from whomever was holding these assets (bank?) should show the amount of foreign income tax paid, if any.

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Originally Posted by ebaines

Could you please provide the section in Pub 550 that you are referring to? On page 23 of Pub 550 in the section regarding stock rights there's a section titled "Basis" which says in part: "Your basis in stock or stock rights received in a taxable distribution is their fair market value when distributed." So I don't see where you're reading that basis is the FMV when sold?

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Thank you for your quick reply. You are right: it reads when distributed. The problem for me it how to determine this "value when distributed", so as to subtract it from the proceeds.

I actually have not paid anything for this "extra" income, so the basis should be "zero" and the proceed would be a 100% profit. Nevertheless, I am confused because it seems that I need to subtract the "cost basis", which (of course) will ease my pain.

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Originally Posted by guscusi

I actually have not paid anything for this "extra" income, so the basis should be "zero" and the proceed would be a 100% profit. .

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It all depends how you received these rights in the first place. If they came as part of a dividend then presumably their value was reported as part of a 1099-DIV the year you receved them, and your cost basis would be the value reported at that time. So - exactly how did you acquire these stock rights?

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Originally Posted by ebaines

It all depends how you received these rights in the first place. If they came as part of a dividend then presumably their value was reported as part of a 1099-DIV the year you receved them, and your cost basis would be the value reported at that time. So - exactly how did you acquire these stock rights?

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I never received anything else than a bank deposit for the total amount of the sale. Nothing reported in the 1099_DIV. No detail or breakdown whatsoever.

I called Etrade again today, and after a long insistence, they told me that they would find out the cost basis. Then they called back and just said that, as the rights were automaticaly sold at market value, without my intervention, they were sold at cost, so no profit generated. When I asked how can I back this with documentation, they told me that at the end of page 23 of Publ 550, it mentions that the cost basis is the fair market value at time of distribution and as I had no choice, they sold at fair market value atomatically, so no profit. The fact is that I have no solid documentation to present to the IRS that they were sold at time of distribution.

Finally, Etrade said that, after matching the cost with the proceeds value as explained above, Publ 550 somewhere says that I should then "substract" or decrease the cost basis of the IRE ADR shares I own in the same amount. I couldn't find that part in the Publ 550, but if I decrease this value from my actual ADR basis, I will be paying in the future, when I sell the ADRs the tax I am not paying now... it would be as if I sold ADR shares at cost...

Call your payroll department and find out if the money you received was reported on your 2010 W-2. If they say yes, have them email that fact to you, specifying the actual transaction by date for the sale of the rights to the ADR shares

If it was on the W-2, then report the sales on Schedule D with the proceeds and basis as EXACTLY the same, showing NO gain or loss, and send it in to the IRS, along with the email that shows the proceeds was added to your W-2 and had income and FICA taxes assessed against it.

That should resolve the issue to the satisfaction of the IRS.

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Originally Posted by AtlantaTaxExpert

Call your payroll department and find out if the money you received was reported on your 2010 W-2. If they say yes, have them email that fact to you, specifying the actual transaction by date for the sale of the rights to the ADR shares

If it was on the W-2, then report the sales on Schedule D with the proceeds and basis as EXACTLY the same, showing NO gain or loss, and send it in to the IRS, along with the email that shows the proceeds was added to your W-2 and had income and FICA taxes assessed against it.

That should resolve the issue to the satisfaction of the IRS.

You may want to take the initiative and amend your STATE return to show the same results to avoid a repeat of this situation down the road with the state tax department.

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Xx

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Originally Posted by AtlantaTaxExpert

Call your payroll department and find out if the money you received was reported on your 2010 W-2. If they say yes, have them email that fact to you, specifying the actual transaction by date for the sale of the rights to the ADR shares

If it was on the W-2, then report the sales on Schedule D with the proceeds and basis as EXACTLY the same, showing NO gain or loss, and send it in to the IRS, along with the email that shows the proceeds was added to your W-2 and had income and FICA taxes assessed against it.

That should resolve the issue to the satisfaction of the IRS.

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Hello,

No, not reported on W-2, as it actually has nothing to do with wages nor the company I work at.

This proceed comes from an investment I have in Bk of Ireland shares (as ADRs, as I reside in the US, not in Ireland). These were stock rights, to buy more shares (ADRs, actually), but as I do not live in Ireland, they were sold at market value and the proceed was sent to me.

My reasoning, as well as Etrade (the broker were I bought them), is that since they were distributed and sold at the same moment, at fair market value, no income was generated, Therefore, the Cost Basis should be = to the Proceed value, so ZERO gain.

The issue is that the bank told me to also decrease the cost basis of the Bk of Ireland shares I own that generated this sale of rights. I would like to know where to find this in Publ 550 or elsewhere.

You can think of it like this:

1. You invested in the Bank of Ireland ADRs. Your cost basis is whatever you invested at that time - for the sake of an example let's say you bought 10 shares at $20 each, for a cost basis of $200.

2. The rights were issued later, and in your case immediately sold. Because they were issued on the same day as sold you can assume that the cost basis is the same as what you sold them for. So as noted in earlier posts - you report a cost basis for those rights that equal the proceeds, and hence $0 gain. For this example let's assume that the market value of the rights is $1/share.

3. Your cost basis is now reduced by that same amount, because you have taken this value out of your investment. Think of it as being similar to a stock split - the distribution of the rights has efffectively diluted the value of the ADRs, so both the cost basis per share and the market value per share are diminished by the value of the rights. If the stock had a market value of $20 before the distribution, immediately after the distribution the market value of the stock would have been $1 less.

4. So your new cost basis per share is $20 - $1 = $19. If/when you sell these ADRs this is the basis you report at that time.

I hope this is helpful.

Well done, ebaines!

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Originally Posted by ebaines

You can think of it like this:

1. You invested in the Bank of Ireland ADRs. Your cost basis is whatever you invested at that time - for the sake of an example let's say you bought 10 shares at $20 each, for a cost basis of $200.

2. The rights were issued later, and in your case immediately sold. Because they were issued on the same day as sold you can assume that the cost basis is the same as what you sold them for. So as noted in earlier posts - you report a cost basis for those rights that equal the proceeds, and hence $0 gain. For this example let's assume that the market value of the rights is $1/share.

3. Your cost basis is now reduced by that same amount, because you have taken this value out of your investment. Think of it as being similar to a stock split - the distribution of the rights has efffectively diluted the value of the ADRs, so both the cost basis per share and the market value per share are diminished by the value of the rights. If the stock had a market value of $20 before the distribution, immediately after the distribution the market value of the stock would have been $1 less.

4. So your new cost basis per share is $20 - $1 = $19. If/when you sell these ADRs this is the basis you report at that time.

I hope this is helpful.

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This is exactly what I also believe. Thank you!

How can I back this with any IRS code or rule which would explain this?

Here are 2 links, which quite show a cost basis calculation with 2 simple exmples.

Should I use this approach, or your suggestion (pls. copy paste the entire link, if it is not clickable)?

http://www.taxalmanac.org/index.php/Treasury_Regulations,_Subchapter_A,_Sec._1.307-1

http://books.google.com/books?id=282dvbqV-1kC&pg=PA592&lpg=PA592&dq=treasury+regulation+sect ion+1.307-1(a)+%2Bsale+of+rights&source=bl&ots=eFp-ba4uyT&sig=oA6zzUUlrnU_NZX_QzkeLus_q8I&hl=en&sa=X& ei=43WqT8i1J4Sk9ATqzODHAw&ved=0CGIQ6AEwBg#v=onepag e&q&f=false